Feb 17, 2015
Executives
Christina Zamarro – Vice President, Investor Relations Rich Kramer – Chairman, President and Chief Executive Officer Laura Thompson – Chief Financial Officer and Executive Vice President
Analysts
Robert Higginbotham – SunTrust Itay Michaeli – Citi Emmanuel Rosner – CLSA Rod Lache – Deutsche Bank David Tamberrino – Goldman Sachs Ryan Brinkman – JPMorgan
Operator
Operator
Good morning. My name is Keith and I’ll be your conference operator today.
At this time, I’d like to welcome everyone to The Goodyear Tire & Rubber Company Fourth Quarter Earnings Conference Call. [Operator Instructions] I would now like to hand the program over to Christina Zamarro, Goodyear's Vice President, Investor Relations.
Christina Zamarro
Thank you, Keith, and thank you all for joining us for Goodyear’s 2014 Fourth Quarter Earnings Call. Joining me today are Rich Kramer, Chairman and Chief Executive Officer; and Laura Thompson, Executive Vice President and Chief Financial Officer.
Before we get started, there are a few items we need to cover. The supporting slide presentation for today's call can be found on our website at investor.goodyear.com, and a replay of this call will be available later today.
Replay instructions were included in our earnings release issued earlier this morning. If I could now draw your attention to the Safe Harbor statements on slide two.
I would like to remind participants on today’s call that our presentation includes some forward-looking statements about Goodyear’s future performance; actual results could differ materially from those suggested by our comments today. The most significant factors that could affect future results are outlined in Goodyear's filings with the SEC and in our earnings release.
The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Our financial results are presented on a GAAP basis and in some cases, a non-GAAP basis.
The non-GAAP financial measures discussed on the call are reconciled to the U.S. GAAP equivalent as part of the appendix to the slide presentation.
And with that, I'll turn the call over to Rich.
Rich Kramer
Thank you, Christina, and good morning, everyone. Today, I’ll discuss our fourth quarter and full-year results and touch on some of the highlights that helped us deliver full-year record segment operating income in 2014.
I’ll also address our outlook for 2015. Laura will follow with the review of each of our businesses and a detailed outlook before we open the call four your questions.
I’m extremely pleased with what our teams in all our regions accomplished over the past year, particularly in light of ongoing global economic volatility, which increased dramatically in the fourth quarter and was amplified by the strengthening U.S. dollar.
In North America, our team delivered record earnings for the year. With steady execution of our strategy, North America continued to win with consumers.
For example, our Assurance All-Season tire launched in 2014 will reach 1 million sold faster than any previous new product. Likewise, our commercial truck business had a strong year as fleets continue to embrace our outstanding products and business solutions model.
Our Europe, Middle East and Africa business had year-over-year segment operating income growth of $140 million. Our product leadership in the region was confirmed by regular wins and podium finishes in the important magazine tests, in addition to setting the pace in European tire labeling.
Latin America featured a steady roll out of new high value-added Goodyear products that were a hit with our customers. In Brazil and Mexico, we grew share by delivering a double-digit increase in consumer replacement volume, as we’ve completely revamped our portfolio to take advantage of the mega trend shift to HVA products.
In the Asia-Pacific region, our volume growth in China and India contributed to record earnings in the fourth quarter. Our products won several awards and we are expanding our distribution to make the most of the opportunities in this growing market.
And 2014 mark the continuation of our operational excellence initiative, which made an important contribution to our earnings growth by delivering cost savings in excess of inflation. In each region, we succeeded through the disciplined execution of our strategy focused on increasing the value of the Goodyear brand.
As you read in our press release, our segment operating income of $1.7 billion was a full-year record. It represents an 8% improvement over last year’s record performance, a significant accomplishment by any measure, but especially gratifying in the midst of challenging global economic conditions in a number of our key markets.
In addition, we generated $1 billion of free cash flow from operations, marking the second straight year we have reached that level of cash generation. As pleased as I’m to report these results, I’ll remind you that our strategy is built for the long-term and our destination is to create sustainable value for our associates, for our customers, and for our shareholders alike.
We believe in the soundness of our strategy and are committed to it even when economic and industry fluctuations demand that we be flexible in our execution. A great example of our strategy in action is our North America business.
North America delivered $229 million in fourth segment operating income, the best performance of any quarter in its history. It was a fitting way to complete a year in which the business reached $803 million of segment operating income, a full-year record.
North America is clearly on a path of sustainable performance, as it continues to strengthen its earnings and margins, as a result of our market-back strategy. Three weeks ago, our annual North America Dealer Conference had the highest attendance in its history.
I came away from that meeting more energized than ever, as our customers were more enthusiastic, more optimistic, and more confident than I’ve ever seen. Many of them, both consumer and commercial truck tire dealers, had very strong years themselves, reflecting the strength of the Goodyear brand in the marketplace and the value of being an aligned Goodyear dealer.
I believe we have the best dealer network in the industry because they do more than just sell tires. They capture the value of everything Goodyear has to offer.
As always, new products were one of the main sources of interest and enthusiasm at the conference. This year, we introduced a completely new line of tires for the Kelly brand to complement our line up of Goodyear passenger and light truck tires.
The new Kelly tires are our response to our customers need for a branded as the favorable option to Asian imports or private label tires. Our Kelly line up reinvigorates a well-know brand that our dealers can sell on its value not price alone.
The number of orders we’ve taken in advance of the Kelly launch this spring has exceeds our expectation, evidence that these tires will be a hit with our customers. Now the biggest news from our Dealer Conference, which you may have heard about already, was the announcement of our plan to start selling Goodyear consumer replacement tires online in North America at Goodyear.com.
This is how consumers are shopping for many goods and services already, and that’s how we believe they will increasingly shop for tires. This new buying option will allow consumers to purchase tires online and have them installed locally at an authorized Goodyear retailer of their choice.
Beyond just making industry-leading innovative tires, we are focused on making the tire buying process easier for consumers and creating profitable incremental sales opportunities for our aligned dealers. The program, which will be activated later this year, is a major step for Goodyear and for our network partner dealers.
As consumer demographics continue to shift and 80 million millennials come into the marketplace, we have to meet their expectations around buying and shopping experiences. By taking the initiative and embracing this digital format to simply the tire buying process, we believe we will be the industry leader in this space.
It’s another Goodyear innovation that goes beyond just tires and a tangible example of our focus on our customers and consumers from the market-back rather than from the factory out. I’m happy to say that the response from our dealers were pivotable to the success of this program has been overwhelmingly positive.
Our collaboration creates synergies to allow both of our businesses to grow, as consumers buying habits evolve. Think about how much our North America business has progressed.
We’ve grown our segment operating income organically from a $300 million loss in 2009 to an $800 million profit in 2014; $1 billion plus rebound in five years. That’s a reflection of a sound strategy and winning execution, and we see continued opportunity ahead.
Returning to our Asia-Pacific business, we delivered a record fourth quarter as we continue to take advantage of growth opportunities across the region. This was despite ongoing economic headwinds in Australia, where we’re still feeling the significant effects of the mining industry slowdown.
Our state-of-the-art factory in Pulandian in China is delivering as planned, producing industry-leading products and providing cost efficiencies to help increase our brand strength and support our growth in the region. Innovative products remain a pillar of our strategy.
And in China, the Goodyear Wrangler was named all-terrain tire of the year and Goodyear Excellence Run On Flat was cited as the Editor’s Choice of the year by a major Chinese automotive magazine. Now even with these successes, a variety of industry and economic headwinds over the course of the year and the quarter change the playing field in 2014 and will continue to have an impact in 2015.
Continued economic and political instability across Europe has affected our business in the region, slowing growth in both Western Europe and emerging markets in the region. In short, Europe continues to muddle along not yet setting itself on a course to a stable recovery.
Venezuela continues to be the most challenging market in Latin America. The economic environment remains difficult and the political situation continues to be unsteady, both clearly affected by the recent decline in oil prices.
It’s becoming increasingly difficult to forecast sales, pricing, and supply in Venezuela with any degree of certainty. Our Brazil original equipment business continues to weaken, as auto production has yet to rebound from an extremely weak 2014 and the country’s economy remains in or near recession.
And slower than predicted global economic growth and reduced industry sales volumes particularly outside the U.S. are combining with low raw material cost to create increasingly competitive environments.
But the most significant headwind from 2014 that will carryover and continue to have an impact into the year ahead is unfavorable foreign currency translation due to the continuing strength of the U.S. dollar.
The effective translation of our foreign results obscures the progress and growth in our business. At current spot rates, this is a headwind of $180 million in 2015.
While foreign currency headwinds will have a negative effect on segment operating income, our underlying business and operations are more robust than ever. Lead by our momentum in North America, we remain committed to our target of 2015 segment operating income growth of 10% to 15% above last year’s record.
So while the headwinds I mentioned are significant and will call for flexibility in our operations, we remain committed to our strategy and long-term goals. The environment is more difficult now than when we set our targets in 2013, but we know that the global tire industry is cyclical and we are prepared to address it.
In the year ahead, we’ll continue to leverage our strengths where the markets are healthy and take a discipline but flexible approach to be positioned for a recovery in weaker markets. We expect global volume growth of 1% to 2% in a tough market, but are confident that our commitment to pursuing profitable volume will continue to deliver strong results.
We believe the best way to reach our long-term objectives is through continued disciplined execution of the key how-tos of our strategy road map. Taken together, these elements will help us reduce the inherent stress or friction in our business and allow us to make it easier for customers to sell Goodyear tires and for consumers to buy Goodyear tires.
We will continue to innovate to meet the needs of our customers and consumers. Investment in our business will be driven from the market-back and geared toward providing the high value products that differentiate Goodyear in the marketplace.
We’ve seen the tangible results from our operational excellence initiatives and will continue our journey to become more efficient in our supply chain, reducing cost, and building the capabilities necessary to serve our customers better. And as we have done with operational excellence, we are committed to building a global platform of sales and marketing excellence to take full advantage of our brand and our value proposition and drive profitable growth.
We are just getting started in this area as we pivot to growth. The value of our brand is never been stronger even as economic conditions remain unpredictable.
Our focus will stay on winning in the market segments where consumers are willing to pay for the value of our brand, our products, our services, and the total Goodyear experience. To meet the increasing demand of our products, we expect our new state-of-the-art manufacturing plant for Latin America and North America to come online in 2017.
This vital new facility will provide us with more of the high value tires consumers are demanding in those regions. We also are optimizing our global manufacturing footprint to ensure our ability to deliver the right tires at the right cost.
Growth CapEx is required to drive our earnings. However, because of the current slower volume growth in some markets, we are adjusting our CapEx investments in the near-term, which Laura will describe later.
As always, we will take a thoughtful approach to investment with an eye on projects that have the highest potential return. In summary, I believe we are better prepared than ever to handle the volatility in our business.
We are mindful of external conditions that affect our business, but we remain committed to profitable growth. We’ve executed our strategy and made investments in our business to gain a competitive advantage.
To increase our competitive advantage in the cyclical tire business, we are increasing our focus on speed and efficiency to better drive our business and improve customer service. There are opportunities across our business to further streamline our operations and improve our processes to better serve our customers and consumers.
We will discuss these opportunities in more detail as we move through the year. Looking back on the full-year, I’m extremely proud of our teams and our achievements.
Our results are evidence that we have the right strategy in place and are delivering record profitability through a volatile period of the economic cycle. We are creating sustainable long-term value and we will continue to do so through a balance of growth investments and actions to reduce costs.
We are planning for the current volatility to stay with us for an extended period of time, but we remain committed to our long-term goals and are confident in our ability to reach them. Our team has worked through the challenging circumstance before and has delivered strong results.
That gives me great confidence that we will able to do it again. The tire industry does not grow in a straight line and we won’t be distracted by short-term swings in the market.
In light of the progress we’ve made by executing our strategy, I’m pleased with the state of our business as we look ahead to 2015. The power of our brand and the execution of our strategy, strengthens our belief that we will continue to increase our earnings and value for shareholders not only when the times are good, but when they are challenging as well.
This is what our strategy was built to do. I’ll now turn the call over to Laura.
Laura Thompson
Thank you, Rich, and good morning, everyone. Today, I’ll cover our fourth quarter results and provide more detail on key items in the quarter.
I’ll also provide specifics regarding our outlook for 2015 before opening the call up for your questions. Turning to slide eight, I would like to highlight a few key items.
In the fourth quarter, both our units sold and our net sales were significantly affected by a year-over-year decline in winter tires sold in EMEA, given the unseasonably warm weather in Europe during the quarter. While our winter tire sales through the third quarter were strong, dealer replenishment in the fourth quarter was severely impacted by very weak sell out, which had double-digit declines in some key markets.
Our EPS on a diluted basics for the quarter was $7.68. Our results were influenced by certain significant items, notably the release of our U.S.
tax valuation allowance of $2.2 billion, which was originally established in 2002. After significant items, our adjusted EPS was $0.59.
More details can be found in the appendix of today’s presentation on slide 26. The step chart on slide nine walks fourth quarter 2013 segment operating income to fourth quarter 2014.
Lower volumes in EMEA in the quarter and unabsorbed fixed cost due to lower production levels year-over-year reduced income by $53 million for the quarter. Milder winter weather in Europe versus last year drove reduced price mix of $81 million partially offset by lower raw material cost of $30 million.
Driven by our operating excellence initiative, strong cost savings across all of our business units for the quarter of $105 million more than offset the $77 million negative impact of inflation. For the full-year, we achieved more than $500 million in cost savings, including $55 million from the closure of our Amiens, France facility, and the exit of the farm tire business.
Foreign currency exchange with a headwind of $17 million reflecting the continued strengthening of the U.S. dollar against almost all other currencies.
Turning to the balance sheet on slide 10, cash and cash equivalents at the end of the year were $2.2 billion, down from $3 billion at the end of 2013. This reduction reflects fully funding the U.S.
hourly pension plan in January of 2014, leaving our global unfunded pension obligation at the end of 2014 at $714 million. This obligation is primarily related to our international pension plans and is in line with our previous guidance.
Our U.S. pension de-risking strategy is working.
While our discount rate in the U.S. declined thereby increasing our liability, our return on asset successfully offset this change.
Separately, at the end of 2014, we made an adjustment to our U.S. pension liabilities to reflect future mortality improvements in our actuarial assumptions.
The result was an increase of $285 million in our pension liability. Despite this increase and based on current assumptions, we expect no required contribution for our U.S.
plans for the foreseeable future. Our total debt balance was up $145 million at year-end.
However, on February 3, 2015, we repaid $200 million on our U.S. term loan.
Free cash flow from operations is shown on slide 11. For the full year 2014, we generated nearly $1 billion of free cash flow from operations, with working capital neither a source nor a use of cash in 2014.
The walk from net income also reflects the non-cash impact of the release of our U.S. tax valuation allowance of $2.2 billion and the provision for deferred income taxes line.
As a final comment on this slide, the other line of $464 million includes various non-cash items reflected in net income. The most notable of these items is the $200 million in net Venezuela currency losses in 2014.
The strength of our cash generation in the first year of our three-year plan, gives us confidence in our ability to deliver on our balanced capital allocation plan. We completed $150 million of share repurchases during the fourth quarter as part of that plan, bringing our full year share repurchases to $233 million, an 8.9 million shares.
Moving now to the business units on slide 12. North America reported quarterly record segment operating income of $229 million and achieved an operating margin of 10.9%, the third quarter in a row at or above 10%.
North America benefited from lower raw material costs and lower conversion cost primarily driven by reduced pension expense during the quarter. North America’s volume was down 1% year-over-year in the fourth quarter.
Similar to the third quarter, our volume was impacted by tariff pre-buy activity and challenges in fully meeting the strong demand for our premium HVA tires. As for the pre-buy activity, the U.S.
consumer replacement industry continue to face disruption from the anticipation of a tariff on consumer tires imported from China. These imports in the fourth quarter remained very strong through November until the announcement of the preliminary countervailing duty rates.
In December, the level of imports declined by almost half on a year-over-year basis. As a result of the speculative buying during the second half of 2014, channel inventories remain at high levels, which we expect will impact our volumes in the first half of 2015.
We also continue to see strong demand for our premium tires, our back orders for these HVA products remain high. As we outlined on our third quarter call, we are leveraging our global footprint for additional supply and are continuing to invest in our North America production facilities to enable us to meet the increased demand for our premium branded tires in 2015.
Our North America commercial truck replacement business also continue to perform well in the fourth quarter. Our industry-leading fuel-efficient drive tire and fleet business solutions strategy leveraged the robust industry conditions for significant year-over-year growth.
To help continue this growth in 2015, we announced our new Fuel Max LHS steer tire at our Dealer Conference. This new tire will now allow us to offer the number one fuel-efficient drive and steer tire combination in North America.
These types of market-back innovative products will continue to allow us to be the leader in premium truck tires in North America. Europe, Middle East and Africa generated segment operating income of $30 million in the fourth quarter and a margin of 2.3%.
Unseasonably warm temperatures resulted in an 11% decline in the European winter tire industry sell-in in the fourth quarter. This had a direct impact on our volume and in turn our results in EMEA.
The overall volume decline impacted EMEA’s SOI by approximately $40 million. The combination of warm weather, decline in raw material costs, weak sell-out, and an increased level of imports mainly in the Eastern countries drove increased competition in the quarter.
Separately, price mix was negatively impacted by raw material index agreements with OE customers. Earlier this year, it finally began to snow across much of Europe and while we don’t anticipate dealers will replenish snow tire inventories during the first quarter, such seasonal weather may benefit sell-out and improve inventory levels heading into our normal sell-in season during the third quarter of 2015.
In commercial truck, we saw the industry stabilize in the fourth quarter after a weak third quarter. Our new products such as the KMAX and Fuel Max.
coupled with our service proposition, have enabled us to win new fleet business and gain share in our premium brands. In Latin America, our volume increased about 8%.
We continue to see strong growth in consumer replacement, which more than offset the continued weakness in the Brazilian OE market. Segment operating income was $20 million for the quarter, $32 million less than the prior year.
The decrease in the Latin American results was largely influenced by three items. First, $28 million in higher conversion costs due to inflation and lower production volumes.
Second, $14 million from increased reserves for a value added tax claim. This item is listed on the fourth quarter adjusted EPS block on slide 26.
And third, $11 million in foreign currency translation. Partially offsetting these three items were the benefits of $15 million from price mix versus raw material cost, and $11 million from higher sales volumes during the quarter.
On the strength of our new product introductions this year in Brazil and improvements in our distribution network, we are gaining share on increased volumes in the consumer replacement business. Given the weaker real, imports are now significantly more expensive locally.
This may facilitate additional opportunities to grow in Brazil in 2015 even if the OE environment remains challenging. In Asia-Pacific, our fourth quarter volume of $6 million units was 7% higher than a year-ago, given our strong double-digit growth in China.
Our Asia-Pacific business reported segment operating income of $80 million for the fourth quarter, representing a 19% increase over the prior year. The impact of higher volumes and strong cost savings performance, net of general inflation, was offset partially by unfavorable foreign currency exchange.
The SOI margin in the region increased to 15.7%, up significantly from last year’s 12.5% While we see slower growth for the region in the short-term versus our original expectations, we continue to view China and the rest of the region as a key long-term growth opportunity. We are investing in our teams, our products, and our capabilities to drive that growth.
On slide 13, we have provided our full-year modeling assumptions for 2015. You will notice that many of these items are unchanged from the planning assumptions we outlined on our third quarter call.
There are a few notable exceptions, namely, an improving price mix versus raw material picture, offset by incremental headwinds in foreign exchange and a deteriorating environment in Venezuela. Our expectation for price mix versus raw material costs has improved, largely on the heels of further declines in raw materials and the increased likelihood of a tariff on Chinese tires in the U.S.
For the full-year, we expect raw materials to be down about 10%, helping drive a 2015 price mix versus raw material benefit of about $200 million year-over-year. This benefit includes the expectation that OTR will have a relatively neutral impact for 2015 compared to 2014.
For a detailed explanation of our raw material benefit calculation, see appendix slide 21. The U.S.
dollar has continued to strengthen. As Rich noticed, we now see a headwind of approximately $180 million from foreign currency translation in 2015.
Given the nature of our business and the size of our operations, we have exposure to several key currencies, notably the euro and the Brazilian real, which are not only a headwind, but a source of uncertainty as well. To assist you in modeling, we have provided a sensitivity analysis for some of our key currencies on slide 22 in the appendix of today’s presentation.
With respect to Venezuela, based on the protracted challenges and significant economic uncertainty, we are assuming our earnings in Venezuela to be zero in 2015. For reference, in 2014, Venezuela’s operating income was $47 million.
For now, our plant continues to operate and we continue to sell tires as we evaluate all options regarding the future direction of our business there. While we don’t anticipate a benefit of any earnings in Venezuela in 2015, we expect to grow our total segment operating income 10% to 15% off of our reported 2014 segment operating income of $1.7 billion.
We expect sales volume growth of 1% to 2% for 2015. However, given the pre-buy in 2014 in North America related to the potential tariff on imported tires and our plans to increase supply of premium tires in the U.S., we anticipate that the majority of our volume growth in North America will occur in the second half of 2015.
That said, we expect the financial impact of the decrease in our tire production volumes during the fourth quarter, primarily in EMEA, to impact Q1 by about $30 million. Overall, we expect unabsorbed overhead to be neutral for the full year versus 2014.
We expect our cost savings initiatives to exceed the impact of general inflation by approximately $160 million with potential upside led by our operational excellence program. We expect savings from the Amiens, France closure and related exit from the European farm tire business to generate approximately $20 million of incremental saving in the first half of 2015 with most of the benefit occurring in the first quarter.
Taken together with the $55 million benefit we saw in 2014, this would bring the annualized benefit to approximately $75 million consistent with our prior outlook. Additional financial assumptions for 2015 are listed on slide 14.
With the release of our U.S. tax valuation allowance, we estimate our tax rate to be about 30% of our global pretax operating income for 2015.
Our cash tax rate for 2015 will remain much lower at about 15% of global pretax operating income as we do not expect to pay cash taxes in the U.S. for about the next five years.
We expect global pension expense of $125 million to $175 million and global pension contributions of $50 million to $75 million all of which will be directed to our international plan. As was the case in 2014, we expect our working capital to be neither a source nor a use of cash in 2015.
We are reducing our planned CapEx spend by about $350 million over the next two years in light of lower than previously expected growth in EMEA and Asia-Pacific. We expect capital expenditures for 2015 to be approximately $1.1 billion and our 2016 CapEx spend to be about $1.2 billion to $1.3 billion.
We will continue to invest where we see strong demand for our products; this include investments in our new manufacturing facility to support the America, which will come online in early 2017. Our earnings growth targets continue to support our balanced capital allocation plan.
With capital expenditures lower by about $350 million over the next two years, we expect to be able to reallocate additional cash to our shareholder return programs, contingent on our performance and our delivering on our financial targets. We remain committed to a balanced capital allocation plan that provides for capital investments for future earnings growth, achieving an investment grade balance sheet and returning capital to shareholder.
So as we look at 2015, the benefits from lower raw material costs, solid economic trends in North America and continued cost savings performance are expected to be partially offset by a more difficult international environment, including a stronger U.S. dollar globally.
While the landscape has changed since we first communicated our three-year targets back in 2013, our plans continue to target 10% to 15% SOI growth in 2015 and 2016. Now we will open the line up for your questions.
Operator
[Operator Instructions] We will take our first question from Robert Higginbotham with SunTrust. Your line is open.
Robert Higginbotham
Good morning, everyone.
Laura Thompson
Good morning, Robert.
Robert Higginbotham
Hey, first question on how you see global product flows post the tariffs on Chinese product coming here. Do you have any sense of where that product being made in China is going to now after you’ve already seen the big decline in imports in the U.S.
in the December data? And if you can kind of walk-through how you’ve embedded or how you’ve contemplated that potential offsets in other markets outside of the U.S.
into your price raw mat guidance?
Rich Kramer
So, Robert, I will start and Laura can jump in. I will tell you I think your assumption to start with is a good one that product will flow somewhere if it doesn’t come to the U.S.
in this case, so those tires will end up somewhere. And you may recall, we’ve talked about it in the past when we had the 421 action that took place relative to Chinese imports into North America, we kind of had a bit of a perfect storm particularly in Brazil where we had a very strong currency and we saw available tires, if you will, and we saw Chinese imports in Brazil go up dramatically based on their availability and again the strength of the currency.
So that phenomena did happen last time. I would suggest to you at this time, it’s a bit early to tell.
I will say - you’ve heard Laura make a comment in her remarks that we are seeing increased flow of Chinese tires and Asian imports into particularly Eastern Europe, so certainly I would suggest there is probably some corollary there. I think as we get into 2015, we will have to see how the product flow moves, but we did see that already in Q4 and I imagine there is some sort of nexus between those.
In terms of - and by the way, we will watch that very closely around the world. But I will tell you, how we build that into our business going forward, that low-end of the market, by and large, is not a market where we have played.
Our value proposition, as you’ve heard us talk about, is playing in those targeted markets segments where we can capture the value of the Goodyear brand. Certainly, our North America business has been on the forefront of that, but also that’s true in our Asian businesses, in our Latin America businesses increasingly so, and in Europe as well.
So while those tires will come in at the low-end and clearly by definition they are going to have an impact, remember that’s not the real part of the market that we tend to play in. So that's how I’d have you think about it.
Robert Higginbotham
Thanks. And then a separate topic.
You got into another strong year of net cost savings above and beyond inflation and certainly follow-through of what you’ve accomplished in the past. Could you give us a little bit more color in terms of what is embedded in that number for this year, mechanically what you are changing, and then kind of what’s the runway to further savings beyond this year?
Rich Kramer
So we were very pleased, I was very pleased that now multiple years in a row, we’re getting cost savings ahead of inflation. And that’s been really linked back to something that we did.
We started, frankly, when I took the job a while back, our operational excellence initiatives in driving efficiency through our business and I would say the result is what you’re seeing and remember that’s a verity of programs through material substitutions to enhanced more effective purchasing, let’s say, through getting our plants to run more efficiently by getting more production out of those factories at the same or lower cost and driving in very specific programs, driving a One Goodyear Way system throughout our manufacturing footprint around the globe, and driving it through transportation and warehousing to make sure that we are getting the right tires to the right customers at the right time. All those programs, I would say, will continue into 2015 and they will continue beyond that.
And I would say we are really just getting stared in terms of driving these programs throughout the world. So you saw in our guidance, I think Laura mentioned we are forecasting about the same net cost out in 2015 as we did in 2014, about $165 million.
That said, you can be pretty sure that our internal goals are to deliver more than that, although we certainly know the global economy is driving a few headwinds as well.
Robert Higginbotham
Great. Very helpful.
I’ll let someone else. Thanks so much.
Rich Kramer
Thank you.
Operator
And our next question comes from Itay Michaeli with Citi. Your line is open.
Itay Michaeli
Great, thanks. Good morning, everyone.
Rich Kramer
Good morning.
Laura Thompson
Good morning, Itay.
Itay Michaeli
So just a question on volume in 2015 and beyond. I think, last month in Detroit, you expressed a little bit of caution on the 1% to 2% target for the year.
It sound like you’re sticking to that. Maybe just talk us through kind of how your outlook and confidence level there spans and maybe also relative to what you’re assuming for pricing for the year?
And then secondly to that, I think, in the 2013 plan, the annual volume growth assumption was like 2% to 3%. With some of the changes in the macro environment and the slight cut back in the growth CapEx, should we think about the next two years as more of that 1% to 2% as opposed to 2% to 3%?
Just wanted to get your thoughts on that.
Rich Kramer
So, Itay, we have not given any guidance beyond 2015 at this point because we did see obviously some significant headwinds coming in. I wouldn’t say starting in the fourth quarter, but certainly making themselves more visibly present in the fourth quarter as we looked at the global economy.
I would say, as we think about volumes for 2015, maybe just to start with that, and certainly Laura can jump in here as well, I would say that one of the elements driving headwinds in volume in 2015 is our European business. And remember what we have going on there is not only a more difficult economy at this point, but we have sort of the ever-present impact of warm winters.
And as we look at 2015, while we see some growth in the summer markets, what’s going to happen again with now our third consecutive, in essence warm winter in Europe, we have a combination of the channels still being relatively full. And maybe if I go back just to shed a little bit more light on it, we planned for a green winter in 2014, so we didn’t plan on it being very robust.
What we got is what we’ve internally sort of referred to as now a yellow winter because we saw sunshine in October and November. So what happened is we had the channels full and very little sell-outs going on and that’s continuing so far into 2015.
We’ve got some warm weather there. But what’s going to happen is those channels are going to remain full.
As we look at winter industry in 2015, we see it actually decreasing again. And on top of the decreasing industry, as dealers now have dealt with three years of green winters, psychologically, they are less inclined, if you will, to go long on winter tires in anticipation of snow.
So those two headwinds say that the Europe market - remember the winter tires are about 30% of the market there - will put a headwind on volume. And those are - Europe is a big market for us, so by the numbers that impacts our volume growth.
I would say we look at other markets, particularly Latin America and Asia. You’ve heard us say we had double-digit growth in volume in Latin America, particularly in Brazil and Mexico.
And that’s the first time we’ve done that in quite some time. So we are very pleased with the volume and share gains we’ve got there.
Our volumes in Asia, let’s say ex-Australia, are also still growing in a very good pace. And with a more robust economy in North America with miles driven up, with new car sales up, with sort of a more positive consumer sentiment, and with a combination of what is our best product portfolio ever.
And on top of that, the selectivity strategy we had at OE now a couple or three years old, getting on those good fitments, those cars are now going to roll into the replacement dealers to get replaced as well. So we see opportunity in North America as well.
So from a volume perspective, roll that up, we’re sort of on that 1% to 2% volume growth in 2015.
Laura Thompson
Exactly.
Itay Michaeli
That’s very helpful. Thanks so much for that detail, Rich.
Just a quick follow-up on capital deployment. Nice to see the increase in buybacks, or at least at the shareholder return program.
I think in 2014, you were running kind of towards the high-end of that $600 million to $900 million previous range. You’ve raised that high-end to $1.25 billion.
Should we assume that you’re going to be looking to accelerate that towards the high-end of that range now, and maybe if you could talk a bit about your preference for dividends versus buybacks?
Laura Thompson
Okay, very good. So, in the presentation, on page 15, we literally took that capital allocation plan that we updated in May of 2014, where our shareholder return bucket was $0.6 to $0.9, right, and right now, through 2014, we have about $650 million approved and around $450 million is our share repurchase program and about $200 million in dividends.
Now as we go forward, right, we’ve shown that we can deliver very strong cash flows and what we’re saying today is based on now our ability to reduce our growth CapEx over the next couple of years that we see the high-end of that shareholder return bucket going to $1.25 billion. Now this is still dependant right, we’re one year into a three-year plan, so it’s still dependant on us making our targets, achieving our numbers and our performance in 2015 and 2016.
But that’s really how we see kind of the cash under the capital allocation plan flowing out over the next couple of years.
Itay Michaeli
Great, that’s very helpful, Laura. Thanks so much every one.
Laura Thompson
Okay. Thanks, Itay.
Rich Kramer
Thanks, Itay.
Operator
And we’ll take our next question from Emmanuel Rosner with CLSA. Your line is open
Emmanuel Rosner
Hi, good morning, everybody.
Rich Kramer
Good morning, Emmanuel.
Emmanuel Rosner
So, first of all, thank you very much for all the modeling detail behind the raw materials and pricing. This is really incredibly helpful in understanding better the dynamics here.
I actually wanted to ask you about just a little bit more on that. When I look at your raw materials assumption, it looks like essentially you’re expecting about a 10% decline in overall raw materials costs, but the way it’s modeled, seems to be like about an 18% decline in your commodity costs.
And I wanted to ask you where does the 18% essentially come from? Is it assuming that the current spot rates continue?
Is there an easy rule of thumb in terms of, okay, if oil price comes down by certain amount, this is where our raw materials bill would sort of end up? And then on the second part of the equation, so raw materials is about a $600 million tailwind, which sort of implies that you’re planning for the gross pricing to be sort of like down $400 million in 2015.
That seems to be the same performance as what you did in 2014 despite a potential help from the Chinese tires, so can you maybe also reconcile how you are thinking about the pricing for 2015?
Laura Thompson
Okay. Well, let me start, I guess, on the raw material piece.
And you are right, with page 20, page 21 in the appendix, we really tired to give a lot more transparency about how commodity prices impact our income statement and cash flows as we go. And one of those new items that we made very transparent out there is that about 25% of our raw material costs aren’t affected by commodity prices, right.
Those are things like R&D and conversion costs and the profits for the vendor as we go. And that helps to really walk us down to that 10%.
Now the 18% is really our view. There is no rule of thumb on that 18%, it’s based on our planning assumptions, on the mix of the products that we will buy and it is based though on current spot rates as we go.
Emmanuel Rosner
Okay, that’s helpful. And then on the pricing side of the equation, it seems like it’s roughly planning for $400 million headwinds this year.
Seems to be about the same performance as what you’ve done in 2014. Any reason why the Chinese tires wouldn’t sort of like help you get a sort of better outcome?
Laura Thompson
Yeah, no, based on the impact of the tariffs we saw in 2009, we did back then see some help as we went on the pricing as it moved up the tiers. Our price mix raws performance when excluding OTR was essentially flat in 2014.
So the $200 million for 2015 is a significant improvement over 2014. We know we can keep that $200 million, but I'd say between RMI contracts that we have around the world and the timing of those and our best estimate is that we met $200 million price mix versus raw.
So we see the same positives that you see, we see some of the same negatives that are out there. And remember, our strategy is very focused on not necessarily what happens to raw material costs, up and down, it’s about pricing for the value of our brands in the marketplace and the whole kind of overall value proposition that we bring to a customer.
Emmanuel Rosner
Great. Thank you very much.
Operator
And we’ll take our next question from Rod Lache with Deutsche Bank. Your line is open.
Rod Lache
Good morning, everybody.
Rich Kramer
Good morning, Rod.
Laura Thompson
Good morning, Rod.
Rod Lache
Couple things to clarify. If you thought about that $200 million net raw material benefit regionally, is it basically that you’re thinking that it’s almost entirely North America, as you look out to 2015?
And maybe you can clarify that and maybe what your thoughts are for the net of price versus raw materials internationally and how we should be thinking about it first half versus second half for this year?
Rich Kramer
Yeah, Rod, I’ll start and let Laura jump in. We don’t break it out by region.
As you know, it’s something that we look at in the aggregate. And I will tell you, clearly, our North America business has an opportunity in that number for increased price mix over raw materials in 2015.
And, Rod, I think you’re right to point out and I think, Laura, said it in her script a bit as well is that the price mix equation versus raw materials in some of the international markets is more challenged by a number of reasons or for a number of reasons, I would say. And one of those certainly is the decrease in raw materials turning up in our raw material indices, or our RMI contracts, with the OEMs and with fleets that, as you know, work up and in this case, they work down as prices go down.
Secondly, as we look around the world, what we see are more competitive pressures in some of the sort of emerging market low-growth countries now, outside the U.S. in particular here, where we see more of the Asian imports that we see coming in like in Eastern Europe that Laura mentioned earlier.
And you pair that up with sort of the depreciating for currencies they have as they buy raw materials or dollar-based raw materials that become more expensive, in those competitive markets what you see is a more difficult price mix versus raw materials in those places as well. And then something, Rod, you are familiar with as well, as we look around the world, we have that lag impact of when those decrease in raw material prices actually come into our cost of goods sold.
And clearly we sort of catch up over time, but that has a headwind as we look around the world in those competitive markets, as well. But, again, I would go back to the fact that over a long period of time we have a very good track record of managing effectively price mix versus raw materials.
We did it when raw materials were increasing 25%, 30% a year, and clearly, our intent is to manage that as we look at the environment we are in right now. And as you rightly point out, we have a positive opportunity to take advantage of that in North America as well.
Rod Lache
Is the first half versus the second half, we should be thinking about that as more back-half weighted?
Laura Thompson
Yes, exactly.
Rod Lache
Okay.
Laura Thompson
Exactly. And really it’s just the timing of when those raws that have declined sharply recently hit the P&L.
Rod Lache
And just my last thing is, maybe it’s very difficult to sort of reconcile how market share is trending. There’s a lot of moving parts, but if you look at the market data that is available, obviously, it looks like the market was up in the fourth quarter by about 7% in North America.
And if you extract the China imports from that, it looks like it may have actually been up even more than that 7%. How do we kind of square that against the 1% decline, especially considering that within North America you are like 70% HVA.
How should we be thinking about your performance here? And it looks like similarly in Europe the performance versus the external market data looks a little bit adverse?
Rich Kramer
Yes, so, Rod, maybe let’s take North America and Europe separately. If we look at North America, I think when you look at 2014 what you have is the market, frankly, being skewed by the tariff actions as we look at the year.
As you know, in Q3, we had some 25% increase in Chinese tire volumes coming in ahead of the potential tariffs coming into place. And in Q4, we saw albeit to a lesser degree, the same thing happen in October and November with the decrease coming in December.
I think that decrease was almost like 40% as we went. So that tariff impact is still sort of clouding what’s really happening in the market, so to your point of - it’s hard to really see what’s going on.
I would tell you, in that market, we have stayed true to our North America strategy or our company strategy of staying focused on our targeted market segments where we can maximize the value of the Goodyear brand. Even in that tough market, we haven’t changed and said, hey, the markets grow and let’s just go sell more tires for volume, for volumes sake.
We haven’t done that and you see that in a record fourth quarter and you see it in a record full-year results. So we are managing it very well.
Now having said that, Rod, to your point, as good as we feel about managing it, we still have more demands for those HVA tires that we are not fulfilling at the moment. So that’s something that we are sort of laser-focused on and what we are doing to get more tires to our customers, we’re getting more out of the existing North America footprint we have from our operational excellence initiatives.
We are investing in our North America factories already, with the CapEx we have to get more HVA tires out of them. We are also leveraging our global footprint and shipping more tires of those HVA tires in as we have some excess capacity around the world.
And finally, albeit a long-term solution, we are investing in the Americas factory for both HVA in Latin America and in North America. So, clearly, we still have more work to do on there as we go, but the positive we are selling into a growth environment, we are very, very well positioned to go do that.
And as regard to Europe, you know, Rod, I would say the European situation again was a bit skewed by winter. If we look through the third quarter year-to-date, frankly, I was very pleased with both our volume and share position particularly as we looked at the winter markets.
We were ahead in both. We were ahead of the industry in both.
And that sort of gave all the way back in Q4, where because we had sold in early and there wasn’t that much sell-out happening, we saw others actually selling more into the market in the fourth quarter where we didn’t because we already had a shelf space or inventory in those channels, if you will. So we gave back some of the share gains we had in the first three quarters of the year.
On a full-year basis, we were essentially fine. And I think this winter SKU, I think another way to think about it, albeit it’s a pro forma way and I’ll say someday it will happen.
I hope I’m hope here to share in it as well. Had we had snow in the fourth quarter, we were extremely well positioned in terms of being on the shelves and having podium-winning product to sell out.
In a green winter - a yellow winter, as we said - I think we had record warm days in October and November. It didn’t happen, and thus we have the situation that you refer to in Europe right now.
Yeah, it is complicated and it is skewed by the weather, but frankly, that is the reality of what happened.
Rod Lache
Okay. So timing in Europe and capacity constraints in North America basically is what you’re talking about?
Rich Kramer
Yeah.
Rod Lache
Okay. All right.
Thank you.
Rich Kramer
Thanks, Rob.
Laura Thompson
Thanks, Rob.
Operator
And we will take our next question from David Tamberrino with Goldman Sachs. Your line is open.
David Tamberrino
Hey, great.
Rich Kramer
Good morning, David.
David Tamberrino
Good morning. Thanks for fitting me in here towards the end.
As I think about the comments you guys have made so far and kind of the reiteration of your 10% to 15% SOI target for 2015, coming off a depressed base in 2014, and then thinking about some of the unusual winter seasonal patterns in Europe, which you just discussed, and the pricing environment in North America, wouldn't it seem that the low-end of that is conservative and that maybe you’re probably going to trend towards the higher end of that 10% to 15%?
Rich Kramer
So, David, I would say - and I’ll let, Laura, jump in as well. But remember, Laura, mentioned two particular headwinds that we have.
One is at current spot rates, we estimate about $180 million of FX headwinds. And for modeling purpose we said with the sort of uncertainty that’s going on in Venezuela right now, we basically said, model it as essentially flat - or excuse me, zero for the year, away from about the $50 million that we had there last year.
So when you add those headwinds in, I would just say those are extremely significant headwinds that we need to manage driving to our goal of 10% to 15%. And we’ve got a very good core business, it’s operating well and I think you’re right to point out that some of that positive momentum is being sort of muted by what are two very, very significant headwinds and of course foreign currency is something we’re going to continue to watch.
That’s at current spot rates, but we don’t know where those will go. And obviously in Venezuela, we continue to monitor that literally on a daily basis to determine what are our next steps as we move ahead in Venezuela.
So there are some headwinds in there that I think we shouldn't lose sight of in terms of working our way through 2015.
David Tamberrino
Okay. I understand that.
But can you just kind of tell us what you’re seeing so far in the North American market for impact of pricing from the tariff. Obviously with, as you pointed out, December imports from China down 50%, you would expect to probably see similar numbers in January and into February here now, but have you seen anything in terms of firming prices or really price increases that have started to trickle up from the low end to the mid-tier and up to your premium priced offering so far?
Rich Kramer
David, we don’t comment on any of the pricing, so I’ll certainly refrain from commenting there. What I will say is that whatever the environment, our team’s focus is to go out and capture the value of what we bring to our dealers out there because that’s an enduring benefit that we need over the long term to drive this business, to drive it forward.
We go out there and the value proposition we offer to our dealers, it’s about products, it’s about our brand, it’s about our marketing support, it’s about our customer service and it’s about bringing them business and we view that value proposition as what ultimately is going to win in this marketplace.
David Tamberrino
Thank you for that. And just lastly from me, can you talk about what you’re seeing in terms of the off-road market?
I believe you are thinking it's going to be neutral so far. Other more global players one have said that they can see - think there is going to be a continued step-down in inventories, another out this morning as well or last night, thinking that, that inventory direction, at least in mining tires, is coming to an end.
What are you seeing in the marketplace?
Laura Thompson
Okay. Our view is probably very similar, right.
We still expect that commodity pricing will continue to be depressed in 2015. We are not saying will see any significant impact from OTR kind of on the positive or the negative year-over-year in 2015.
We are seeing some of that mine tire inventory still at higher levels than really I think anybody expected by now, but we're really not seeing the draw-down as quickly as maybe as we thought. So we still anticipate inventories will decrease in 2015 versus 2014 of kind of all tires, especially, and just for us, in this business with our kind of very specific, unique customer mix and some of the demand opportunities we’ve created over the past year or two, again, we still see it as a tough market in 2015, but really just feel comfortable with kind of our outlook and our business, and again, it not been a significant driver of SOI year-over-year either way.
David Tamberrino
Great. Thanks for the color.
Operator
And we will take our final question from Ryan Brinkman with JPMorgan. Your line is now open.
Ryan Brinkman
Hey, thanks for squeezing me in.
Rich Kramer
Sure, Ryan.
Ryan Brinkman
Yeah, thanks. Just to follow-up on the earlier price mix to raws questions, we're really delving into only price mix for a second, and only in North America.
Now that we know what the anti-dumping piece is versus when you spoke in Detroit in January and we weren't sure yet, I'm curious to think that the average price of a tire North America, what it does in 2015 relative to 2014. Could industry pricing remain roughly flat despite a big fall off in raw mats that would ordinarily be passed on through to distributors and the consumer?
Rich Kramer
Yeah, Ryan, I think again, the question on where price is going is something we are going to refrain from responding to you, that’s something we don’t talk about.
Laura Thompson
Correct.
Ryan Brinkman
Okay, maybe just separately then, North America margins are already at record high levels, or North America profit, as we enter into 2015, even before a raw mat benefit or a potential price mix benefit. Where do you think these margins could ultimately go?
Is there any natural limit that we should be thinking about in our models of what you could possibly generate here?
Rich Kramer
Well, Ryan, we haven’t talked about – I guess number one, I’m really happy to have a discussion on how high your North American margins could go having had discussions on how low they were many years ago, so I feel good about talking about this. I think as we look at it, we haven’t thought about the business in terms of how high they can go.
You can look around the tire industry globally and look at sort of the competitive landscape and see where margins are and that’s certainly a reasonable thing to do. I think our focus really is really consistent with what we talk about internally and that’s really creating value, sustainable value over the long-term and understanding the tire industry is a very cyclical industry and that our job is to grow this business, grow it profitability, win with our consumers in the marketplace and really help our partner dealers, our network dealers grow their business.
Some periods those margins are going to go higher and some periods those margins are likely going to be more challenge, but over the long-term, our goal is to drive higher highs and higher lows in our North America business.
Ryan Brinkman
Okay. That’s helpful.
Thanks for all the color today.
Rich Kramer
Thank you.
Laura Thompson
Thanks, Ryan.
Rich Kramer
Okay. Thanks everyone for joining us today.
We appreciate it.
Laura Thompson
Thank you. Bye-bye.
Operator
Thank you for your participation. This does conclude today’s program.
You may disconnect at anytime.